Disclaimer: This article does not recommend to buy, hold or sell Haw Par Corporation. You must seek appropriate financial advice before acting on any information contained in this article.

Haw Par Corporation is a diversified and highly conservatively run company which has been listed on the Singapore Stock Exchange since 1969. This company is similar in many respects and could rightfully be called a smaller Singaporean version of Berkshire Hathaway, although a more realistic comparison would be ASX-listed Washington H. Soul Pattinson due to it’s similar size, single dominant family, payment of dividends and concentrated investment style akin to Soul Pattinson. Soul Pattinson is often called the Australian Berkshire Hathaway, so I guess I am still comparing Haw Par to Berkshire regardless.

Tiger Balm, banking and property sum up Haw Par Corporation. It’s main operating business is it’s consumer healthcare business which primarily sells Tiger Balm Ointment. Today though, most of the company’s value comes from its ‘strategic investments’ in United Overseas Bank Limited and UOL Group Limited, both listed on the Singapore Stock Exchange. Haw Par also owns investment properties in Singapore and an oceanarium called Underwater World Pattaya, located in Pattaya, Thailand. The company is primarily controlled by the Wee Family of United Overseas Bank and it is extremely conservatively managed. The list of Major Products & Services of the company is listed in the below image.

In 2018, the Healthcare segment contributed $77.3 million of profits before interest and tax, $105.7 million was contributed by the Investments segment and the Property & Leisure segment generated $12.3 million.

Source: Haw Par Corporation 2018 Annual Report

Haw Par is a financial fortress with $519,627,000 in cash and just $102,419,000 in total liabilities as of 2018. The value of strategic investments, net cash and investment properties is $2,974,243,000, equivalent to 96% of Haw Par Corporation’s $3.09 billion market capitalisation (as of September 2019). All figures in this article are in Singapore Dollars.

Haw Par has an extremely consistent dividend history. The company tends to pay a very reliable ordinary dividend and every now and then pays out a special dividend such as in 2018, 2015 and 2007. 2018 was a bumper year for dividends, with a massive 85 cents per share special dividend (total dividend 115 cents) compared to the 20 cents dividend in 2017. The large payout was apparently to celebrate the company’s 50th Anniversary, although I’m sure the huge cash pile on the balance sheet also had something to do with it. 🙂 As a result the cash pile has decreased by 21.6% to $407.6 million as of the Second Quarter 2019. I will be using the 2018 figures for this article since the quarterly results are unaudited and not as detailed as the full 2018 Annual Report. It is important to note that this cash pile has been many years in the making, see the graph below. Management has consistently increased cash on hand over the years, with most of the major dips in cash occurring in years in which special dividends were paid.

Source: Author based on Haw Par Annual Reports

Like Berkshire, Haw Par Corporation is readying it’s war chest for acquisitions if the opportunity presents itself. As company Chairman Wee Cho Yaw states in Haw Par’s 2018 Annual Report:

Seeking new business opportunities and acquisitions remains our strategic priority. We keep an open mind for suitable opportunities that may arise in the midst of volatility. Over the years, the Group has maintained a strong balance sheet and steadily grown its cash position through disciplined investment and cost management. This robust foundation will put us in an ideal position to seize growth opportunities that may surface (pg. 3 2018 Haw Par Corporation Annual Report).

The cherry on the cake is Haw Par’s wonderful ‘blue chip’ board. Haw Par Corporation has 11 directors all of whom have extensive experience (i.e. they are all super old) and have for the most part been on the board for many years. The company’s chairman is Wee Cho Yaw, who has been in charge of the company since 1975 and is currently 91 years old. One interesting member of the Board is Lee Suan Yew who is the brother of the famous Lee Kuan Yew, former Prime Minister of Singapore. The Wee Family controls a substantial portion of Haw Par, which is something to consider.

Haw Par Corporation Shareholders 2018 . Source: Haw Par Corporation 2018 Annual Report
Haw Par Corporation Wee Family Major Shareholders 2018. Source: Haw Par Corporation 2018 Annual Report

Consumer Healthcare

Source: Haw Par Corporation

The consumer healthcare segment sells Tiger Balm and Kwan Loong branded consumer healthcare products. According to surveys conducted by Haw Par Healthcare, 8.5/10 people who try Tiger Balm continue using the product after their first purchase (Source). Tiger Balm was originally invented by Aw Chu Kin in 1870 in Myanmar (then Burma). Aw Chu Kin owned a pharmacy in Yangon, Myanmar (then Rangoon) and sold ointment which he manufactured himself. When Aw Chu Kin passed away in 1908, he passed the family business onto his two remaining sons, Aw Boon Par and Aw Boon Haw. Boon Haw means ‘gentle tiger’ in Hokkien and in 1924 Aw Boon Haw decided to name the ointment Tiger Balm after himself. The two brothers then renamed the business Haw Par Corporation. In 1926 they moved their business to Singapore where they became one of the richest families in Singapore. After the two brother’s deaths in the 40s and 50s, the business did not perform well. This resulted in the company listing on the Singapore and Malaysian Stock Exchanges in 1969. One year after its listing the company was taken over by British conglomerate Slater Walker. When Slater Walker got into severe financial difficulties in the 1970s, Wee Cho Yaw of the United Overseas Bank took over the company and to this day still has a substantial interest in the company. For more information about Aw Boon Haw and Tiger Balm, I recommend reading this article from the Singapore National Library Board.

Old Tiger Balm Advertisement with both Aw Brothers in the Centre. Source: Haw Par Corporation

Today, Tiger Balm can be found in medical cabinets of people from all backgrounds throughout Asia. It is used for anything from aches and pains to asthma and blocked noses. Got a cold? Put some Tiger Balm on it. Sore feet? Put some Tiger Balm on it. Broken arm? Put some Tiger Balm on it. After aggressive expansion efforts since 1992, Tiger Balm is now sold in 145 countries with Europe now accounting for a substantial percentage of sales. In the Western world celebrities such as Gwyneth Paltrow and Lady Gaga are known to be fans of the product.

Haw Par Corporation Tiger Balm is a Global Brand pg. 21 2018 Annual Report

The Tiger Balm trademark is registered in 145 countries with 50 million units being sold in a given year. Tiger Balm products are sold around the world using distributors. Haw Par Healthcare Executive Director AK Han talked to Enterprise Singapore about how they select distributors:

“Distribution is one of the trickiest aspects. His key requirement selecting a distributor: “he has to be ‘hungry’ and not poor, so we can grow together”. According to Mr Han, a hungry distributor is one that loves you and will hence give you priority. At the same time, he must have the financial clout to develop your market.

Problems arise with distributors when they take Tiger Balm off the priority list. And that’s what happened just a few years ago in Germany, a significant market that makes up 40 to 50 per cent of European sales. “Obstacles are ongoing. But it helps as we go in and develop ourselves more, understand the market more.” An amicable break-up with Klosterfrau, Haw Par’s German distributor of 40 years, ensued. After which Haw Par immediately approached IE Singapore for help to find another distributor, one which could also invigorate marketing efforts.” (Source).

To read more about Haw Par Healthcare, I recommend reading this article (from which the above quote is extracted).

The Healthcare Segment primarily sells to ASEAN and other Asian countries. Sales to countries outside of Asia account for just under 20% of total sales. The 80% exposure to wider Asia gives Haw Par Healthcare significant exposure to the growing Asian middle class and Asia’s growing population more generally.

Source: Haw Par Corporation 2018 Annual Report

The consumer healthcare business is of high quality, and has been growing for many decades. In recent years, the segment’s profit has more than tripled from less than $20 million in 2008-2012 to over $70 million in 2016-2018. The increasing population of Asia, the increasing size of the Asian middle class, operational improvements and expansion into new markets such as Europe and North America have all contributed to improved profitability.

2014 to 2017 have been restated following the adoption of the new financial reporting framework, Singapore Financial Reporting Standards (International) (“SFRS(I)s”) on 1 January 2018. Source: Author based on Haw Par Corporation Annual Reports

Strategic Investments

The strategic investments segment is the most substantial segment in terms of asset value. This segment provides the company with a stable dividend stream to whether any financial storms. The segment’s two main investments are UOL Group and United Overseas Bank. The profit of this segment fluctuates from year-to-year, but generally stays around the $50 million mark.

Note: Profit for all years up to and including FY17 includes profit from United Industrial Corporation. Source: Author based on Haw Par Corporation Annual Reports.

UOL Group is a real estate company with total assets of approximately $20 billion. The company has a diverse portfolio of residential and commercial development properties and investment properties across Singapore, Australia, China and the United Kingdom. UOL has been around for about 50 years. UOL also owns a Hotel business called Pan Pacific Hotels Group which owns and/or manages over 30 resorts, hotels and services suites across Asia, North America and Oceania primarily under the Pan Pacific and PARKROYAL brands. Additionally, Pan Pacific also runs St. Gregory Spas and Si Chuan Dou Ha Restaurants in Japan, Kuala Lumpur and Singapore. The hotel subsidiary has a presence in Australia, Bangladesh, China, Canada, Malaysia, Myanmar, Philippines, Singapore, the United States and Vietnam. For more information on I recommend browsing the Pan Pacific website.

Source: UOL Group Annual Report

Property development and property investing are the most important business segments for UOL Group. In 2018, 59% of profit came from property investments. The gross investment income Haw Par receives from UOL Group has consistently been around $7 to $8 million

Note: Gross income for all years up to and including FY17 includes gross income from United Industrial Corporation. Source: Author based on Haw Par Corporation Annual Reports

In 2017, Haw Par Corporation’s investment portfolio was restructured with their investment in United Industrial Corporation Limited exchanged for shares in UOL Group Limited and cash. The restructuring of their portfolio involved disposing of their shares in United Industrial Corporation for 27.27 million shares in UOL Group and $31.7 million cash. Haw Par currently owns 72.04 million shares in UOL Group.

United Overseas Bank (UOB) is the 68th largest bank in the world by market capitalisation and is one of only three local banks in Singapore. The other two are DBS Bank (which also owns POSB Bank) and OCBC Bank (which also owns Bank of Singapore). UOB primarily operates in Singapore, Thailand, Indonesia, Malaysia and China.

Source: United Overseas Bank 2018 Annual Report

Over the years Haw Par has increased its holdings in UOB, from holding 63.88 million shares in 2009 to holding 74.85 million shares in 2018. The gross income Haw Par receives from its investment in UOB has slowly increased over the years, now averaging around $50 million in a normal year.

Numbers are in 000’s. Source: Author based on Haw Par Corporation Annual Reports

In 2018, the fair value of Haw Par’s Strategic Investments in UOB and UOL Group was $2.7105 billion, compared to the cost price of $855.9 million.

Source: Haw Par Corporation 2018 Annual Report

Investment Properties & Oceanarium

For accounting purposes the investment properties (the ones owned directly by Haw Par) and the Pattaya Oceanarium are lumped into the same segment. This is because they account for such a small amount of the company’s overall revenue and profitability relative to the Consumer Healthcare and Strategic Investments segments.

Haw Par owns four properties, three located in Singapore and one located in Malaysia. As is common in Singapore, the Singapore buildings are all leasehold properties.

Haw Par Corporation Investment Properties pg 87 2018 Annual Report

The occupancy rate for all properties is 67.8%, driven lower by the Malaysian property which is facing tenancy issues.

Source: Haw Par Corporation 2018 Annual Report

The valuation of the properties according to independent valuers is $214,060,000 and the book value is $56,569,000. The approach taken to valuing the properties is very reasonable. As described in Haw Par’s 2018 Annual Report (pg. 86):

The Group engages an external, independent and qualified valuer to determine the fair value of the Group’s property at the end of every financial year based on the property’s highest and best use. Discussions on the valuation process, key inputs applied in the valuation approach and the reasons for the fair value changes are held between the property manager, certain directors and the independent valuer annually. The fair value of the Group’s investment properties is determined based on significant unobservable inputs and categorised under Level 3 of the fair value measurement hierarchy. Level 3 fair value has been derived using the income capitalisation approach where the net rental income after property tax is capitalised at a rate which reflects the present and potential income growth over the unexpired lease term. The most significant input into the income capitalisation valuation approach is the capitalisation rate of 5.25% to 7% (2017: 5.25% to 7%) per annum. An increase in capitalisation rate will result in a decrease to the fair value of the investment property.

Some of these properties are pledged as security for bank loans. The company received gross rental income of $17,015,000. When direct operating expenses of the properties is deducted (totaling $,7,334,000) rental income for 2018 was $9,681,000. Historically, Haw Par’s gross rental income has usually been around $15 million.

Source: Author based on Haw Par Corporation Annual Reports

Underwater World Pattaya appears to be a good business. It is one of the main attractions for tourists visiting Pattaya and has an average 4.1/5 star Google review rating based on 6936 Google reviews.

Underwater World Pattaya Google Reviews. Source: Google

While revenue from Underwater World Pattaya is not reported seperately, it can be calculated indirectly by deducting rental income from total revenue attributable to the ‘Other’ segment. This means that revenue from the oceanarium was approximately $4,697,000. Thus, Underwater World Pattaya is a very minor contributor to Haw Par’s overall profit.

Underwater World Pattaya. Source: Underwater World Pattaya

Valuation

Haw Par uses Return on Assets (ROA) to evaluate financial performance. In 2018 the Healthcare segment had an ROA of 65.4% while the Leisure & Property segment had an ROA of 22.2%. Both these rates are very good. The ROA for the Investments in 2018 was 3.6%, which essentially just reflects the dividend yield of UOL Group and United Overseas Bank. Due to the large asset value of the Investments segment, the Group’s overall ROA is 6.1%. This figure is a rough approximation of the long term rate of return we can expect from the company – ultimately the underlying business performance is what determines stock price performance.

Source: Haw Par Corporation 2018 Annual Report

The value of strategic investments and net cash (cash – total liabilities) is $2,760,183,000. This excludes the consumer healthcare business, investment properties and the oceanarium. If we add the value of the investment properties ($214,060,000) the value of underlying assets comes to $2,974,243,000. At the current share price, this values the consumer healthcare business and the oceanarium at $115,757,000, an historical premium, usually we get these businesses for free.

Historically, Haw Par has traded at a price to book value roughly between 0.60 and 0.90. The company is currently trading at a historical premium price to book value of around 1.00. It sounds strange to say it but a price to book ratio of 1 is actually quite high for Haw Par.

Haw Par Corporation Share Price vs NTA. Source: Haw Par Corporation

Over the last five years Haw Par’s free cash flow (FCF) has ranged between $56 million to $123 million, with the average FCF being $100 million.

Source: Morningstar Financials

Haw Par is currently trading at a $3.10 billion valuation. Thus, the company is currently trading at a 2.5% FCF yield based on FCF of $78 million in 2018. Based on the 5 year average FCF of $100 million, the current price represents a 4.3% average FCF yield. This low FCF yield is due to the low dividend yield of Haw Par’s strategic investments and the high cash on the balance sheet.

Source: Google

I value the business, based on FCF anywhere from $850 million to $2 billion depending on required rates of return and growth assumptions. If we add in the cash the minimum valuation is above $1 billion.

This is a conservatively run company with a rock solid balance sheet. Thus, I think this company will deserve a premium valuation. It is a safe company which people are generally willing to pay a premium price for as safety is greatly valued by some investors. In this respect, Haw Par reminds me of Washington H. Soul Pattinson (ASX: SOL) here in Australia. Despite the business’s high quality, the company is clearly overvalued at current prices. I would be willing to establish a position in this company at a price around $10 per share, which I estimate is the company’s approximate fair value. Haw Par last traded at this price in 2017, so this is not an unreasonable price. This price factors in the company’s great overall quality. If we use net asset backing to value the company, its value is about $13 per share, which is more or less the current share price. You won’t be getting rich quickly by buying Haw Par at $10 or $13 per share, but over the long term you will probably perform quite well. The quality of the group’s healthcare business and the quality of UOL Group and United Overseas Bank will ultimately determine the long run performance of the share price.

Conclusion

Haw Par Corporation appears to be very well managed company. I think I have said that a lot in this article, I just love a good old-fashioned net cash balance sheet combined with a diversified high quality business with experienced management. 🙂 While you might not get massive growth from Haw Par, it’s exposure to growing Asia and it’s past history suggests that in the long term Haw Par will continue to slowly-but-surely provide investors with satisfactory returns. While there is some risk surrounding succession of the 91 year old Chairman, including the question of what the Wee family does with its substantial holdings in Haw Par, the extensive experience of the other board members will hopefully enable the company to remain on course regardless of what happens. There is also the question of what Haw Par will decide to buy with its massive pile of cash, if it decides to buy anything at all. This gives the company substantial upside potential, albeit we have no idea what it could be. Alternatively, they could make a bad acquisition and destroy a lot of shareholder value. Based on past investments I think the risk of this is small, but it could still happen. Everyone makes mistakes. In the 2018 Annual Report, Haw Par’s Chairman noted in his company outlook three main risks facing the business in the coming years:

  1. Escalating Trade Protectionism and Uncertainties could Deteriorate Business Sentiments and Impact Consumer Spending
  2. Increased Prices of Raw Materials May Impact Healthcare Division’s Earnings
  3. Renewing of Underwater World Pattaya to Enhance Visitor Experience

Despite these issues, Haw Par is a financial fortress which could quite easily whether a severe global recession, although the share price would likely be hammered as the value of its investments in UOB and UOL Group reduce in value. In the GFC the share price crashed by 45%. This company is one I’m going to watch.

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